Details: Private health insurers tend to be quite passive in the face of health care cost escalation ? simply passing increased costs forward as increased premiums or back as reduced coverage and larger requirements for patient payment. (Think of Canadian drug insurers.) How would one interpret cost escalation in the framework of part a. above? Is there any reason for insurers to worry about cost escalation, or might it in fact be good for their business? Over twenty years ago, however, large employers in the U.S. became sufficiently troubled by cost escalation that some began to ?self-insure,? bearing the risks of their employees? health expenditures themselves and contracting with insurers only to administer the premium collection and claims payment process (for a fee). They began t look for firms that could offer various forms of cost control services (?managed care?). Traditional insurers also moved into this market, initially with apparent success as suggested by American cost trends between 1992 and 2000. (These activites, however, generated significant additional administrative costs, both for cost controllers and for providers revisiting their control.) Since 2000 these private market initiatives seem totally to have lost their grip (in market contrast to the experience of other industrialized countries.) Employers are beginning to roll back coverage, passing more of the costs onto employees. What does this experience suggest about the determinates of health care costs, and the long-run scope for private health insurance even with subsidy and compulsion?

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